Reportage

The phasing out of the 10 per cent corporate tax rate and the move to reduce the standard rate of corporation tax for trading income to 12.5 per cent has been well highlighted internationally. Agreement with the European Commission (EC) was reached in July 1998 on the phasing out of the 10 per cent corporate tax regime which, in the main, applied to income from goods manufactured in Ireland, certain grant-aided computer service operations and certified activities in the Dublin International Financial Services Centre (IFSC) and the Shannon Development Zone. While grandfathering has been granted for companies that are eligible for the 10 per cent tax prior to the July 1998 agreement with the EC until the end of 2003, 2005 and 2010 (depending on the nature of the activity and the date of approval), the new dawn for companies is the 12.5 per cent rate of corporation tax.

This new rate, taking effect from 1 January 2003 (with the rates for the calendar years 2001 and 2002 being 20 per cent and 16 per cent respectively) is a national rate which does not discriminate between activities. Consequently, it complies fully with the European Union's (EU) code of conduct and, as a national rate, is unmatched in the EU. The 12.5 per cent rate is available now to companies whose taxable income does not exceed IR£200,000 (£158,490).

The low rate is available on trading income and, together with Ireland's treaty network and ancillary domestic law, provides a comprehensive formula for the efficient location of business in Ireland.

To qualify for the reduced rate of corporate tax, income must derive from an Irish “trade”. This term is not exhaustively defined in the legislation, but guidance is found in UK case law and the long-established UK “badges of trade”. Activities that fall within the definition include a broad range of IT companies (involved in activities such as hardware manufacture, software development and localisation, wafer production and telesales), telecommunications companies (involved in equipment manufacture and telecoms exploitation) and pharmaceutical companies (involved in varying degrees of product manufacture). E-commerce operations, such as data centres and web hosts, which are based in Ireland also qualify. The establishment of such activities in Ireland has clearly been facilitated by recent Organisation for Economic Cooperation and Development pronouncements on websites and servers not generally constituting permanent establishments.

Securitisations and repackagings are not attracted to jurisdictions by low rates of tax, but rather by a regime of benign listing, bankruptcy and taxation laws. Ireland has had a relatively favourable tax regime for securitisations for a considerable number of years, which has facilitated the execution of a number of domestic mortgage securitisations and cross-border securitisations through the IFSC.

The taxation laws have been amended over the years to enable securitisation companies to be established outside the IFSC, to facilitate profit extraction from these companies by originators and to deal with the income tax position of holders of notes. This, together with investor demand for EU issuing companies, has caused many London-based arrangers to look at Ireland. A further impetus has been given by the difficulties being experienced in issuers obtaining Inland Revenue rulings in some of the more traditional EU issuing jurisdictions. The Irish regime, like the UK one, is not dependent on Inland Revenue rulings in order to execute securitisations. Consequently, Ireland is experiencing an increase in cross-border “true sale” and synthetic securitisations and the establishment of repackaging programmes using Irish issuers. The collateral debt obligations (CDO) market is also considering Ireland and, subject to such transactions being structured in a manner that circumvent the interest recharacterisation rules, they too may have a home in Ireland.

Peter Maher is head of the tax department at A&L Goodbody